The validity of VAR is linked to the problem of probabilistic measurement of future events, particularly those deemed infrequent (more than 2 standard deviations) and those that concern multiple securities.I conjecture that The definition I used for the VAR came from the informative book by Philippe Jorion, "It summarizes the expected maximum loss (or worst loss) over a target horizon within a given confidence interval".I would accept VAR if indeed volatility were easy to forecast with a low standard errorn the apology of engineering, I would like to stress that the applications of its methods to the social sciences in the name of progress have lead to economic and human disasters.
I believe that the VAR is the alibi bankers will give shareholders (and the bailing-out taxpayer) to show documented due diligence and will express that their blow-up came from truly unforeseeable circumstances - not from taking large risks they did not understand.
But my sense of social responsibility will force me to menacingly point my finger.
Nor do I believe that the ARCH-style modeling of heteroskedasticity that appeared to work in research papers, but has so far failed in many dealing rooms, can be relied upon for risk management.
The fact that the precision of the risk measure (volatility) is volatile and intractable is sufficient reason to discourage us from such a quantitative venture.
Banks have the ingrained habit of plunging headlong into mistakes together where blame-minimizing managers appear to feel comfortable making blunders so long as their competitors are making the same ones.